BOYLSTON NAT. BANK OF BOSTON v. WAINHOUSE et al. In re HARRIS, 14 F.2d 385

JOHNSON, Circuit Judge. This case brings up on appeal the order of the District Court of Massachusetts disallowing in toto the claim of the bank against the alleged bankrupt on certain promissory notes; the referee in bankruptcy having found. that these notes were paid by new notes. On March 21, 1923, an involuntary petition in bankruptcy was filed, in which Eugene B. Harris was alleged to be bankrupt. At that time the bank held the notes of Harris for the sum of about $50,000. At the hearing in the court below this amount had been reduced to $39,007.65, as found by the referee.

That this amount was due upon the old notes is not in dispute, unless the old notes were paid by certain new notes hereinafter described.

On September 5, 1923, before there had been an adjudication upon the petition in bankruptcy, an agreement was entered into between Harris and the bank, through their attorneys, by which Harris deposited in escrow with, the attorney for the bank, five notes, of an aggregate amount of $30,000, which was the amount of Harris’ debt to the bank over and above the amount which the bank could legally, recover from the property which it had under attachment and from collateral remaining in its hands.

By the terms of the agreement by which these new notes were deposited in escrow, the bank was to retain the old notes only for the purpose of obtaining judgment entered in the action, which it had brought and which was pending in the superior court of Massachusetts, and also for the purpose of proving in bankruptcy, in ease there should be an adjudication.

As soon as judgment should have been entered in the law action, and the bankruptcy proceedings finally disposed of, the old notes were to be returned to Harris, and the new notes, for the full amount then remaining due, after crediting Harris with the amount realized on collateral held by the bank and from the sale of the property which had been attached by it, were to be delivered by the attorney who held them to the bank.

Upon receipt of the new notes, the attorney who received them indorsed upon an envelope in which they were inclosed the following: “These are held by me in escrow, until such time as Harris shall make satisfactory arrangements with his other creditors, so that he can come back and go to work.” On June 7, 1923, the petitioning creditors filed a motion to amend their petition by inserting therein an additional act of bankruptcy.

This was opposed by the bank, and the petition to amend was denied by the District Court Upon petition to revise this order of the District Court, this court reversed its order and remanded the case. In re Harris (C. C. A.) 299 F. 395, 39 A. L. R. 252. The opinion of this court was announced upon June 10, 1924. Certiorari was denied by the Supreme Court in 266 U. S. 616, 45 S. Ct. 96, 69 L. Ed. 469. A hearing upon the question of adjudication was suspended by reason of the petition to file an amendment; but, after this petition was disposed of, the alleged bankrupt filed an offer of composition.

The offer of composition was referred to the referee in bankruptcy on April 21, 1925, and a meeting to consider it was called for May 26, 1925. An examination of the bankrupt was had before the referee in bankruptcy on May 28, 1925. On May 26, 1925, the bank filed a proof of its claim for the balance of the indebtedness due to it on the old notes. At the examination of the bankrupt before the referee, the agreement between the bank and the bankrupt was disclosed. On June 15,1925, there was a hearing before the referee on' the allowance of the bank’s claim.

On June 26, 1925, petitioner’s creditors filed formal objections to the allowance of the bank’s claim.

On July 9, 1925, its claim was disallowed by the referee, the referee holding that the delivery of new notes to the bank, to be heid in escrow, constituted payment'of the old notes, and the District Court has affirmed this order, stating in its memorandum of’ decision, “that the old notes can no longer be used by the bank as a basis of proof, since they were extinguished by the agreement.” This is assigned as error, and also the refusal of the referee to allow the petitioner to surrender the new notes and to prove its claim.

When the bank filed its proof of claim, the offer for composition was then pending, and, although there had been no adjudication, it was properly filed, as there had been an examination of the bankrupt. On July 29, 1925, the referee filed his report on the composition proceedings, holding that the alleged bankrupt had failed to complete his composition offer, and recommending that adjudication take place forthwith.

The refusal of the referee to allow the proof of the bank’s claim, based upon its old notes, was placed by him, as well as by the District Court, upon the ground that the old notes had been paid by the new notes.

From a careful examination of the agreement of September 5, 1923, which is made a part of the record, and under which the new notes were deposited in escrow, as well as of the testimony of the bankrupt and his attorney and the attorney for the bank, we can reach no other conclusion but that the new notes were deposited in escrow, to be delivered to the bank upon completion of the terms of the agreement, and that, as these terms were never complied with and the notes never delivered to the bank by its attorney, who held them in escrow, they did not operate as a payment of the old notes.

The referee in his report also suggests that “there should be some penalty imposed upon a creditor who strives to overreach the others, and that penalty should not be avoided by the creditor’s offer to surrender when caught,” which seems to have had some weight with the District Court, as appears in the memorandum of decision which was filed. There is no evidence that the old notes upon which the bank based its claim were tainted with-fraud in any way, and, even if the bank had sought to obtain a preference, its proof of claim, after it had offered to surrender the new notes, could not be disallowed. In Keppel v.

Tiffin Savings Bank, 197 U. S. 356, 25 S. Ct. 443, 49 L.

Ed. 790, the court held that, even where a creditor of a bankrupt had received a voidable preference, and retained it until deprived thereof by the judg-. ment of a court upon suit of the trustee, he could thereafter prove the debt upon'which he had received a preference, 'and that the court was without power to inflict a penalty upon the creditor for having attempted to obtain a preference, the court stating in its opinion, that the surrender of a preference “was intended simply to prevent a creditor from creating inequality in the distribution of the assets of the estate by retaining a preference, and at the same time collecting dividends from the estate by the proof of his claim against it, and consequently that, whenever the preference has been abandoned or yielded up, and thereby the danger of inequality has been prevented, such creditor is entitled to stand on an equal footing with other creditors and prove his claims.” In Page v.

Rogers, 211 U. S. 575, 29 S. Ct. 159, 53 L. Ed. 332, this decision was affirmed. In that case the creditor had been compelled by litigation to surrender the preference which he had received, and the court said in its opinion: “Now that this litigation has come to an end, and the defendant has been compelled to surrender the preference which he received, he is entitled to prove his claim, and to receive a dividend on it upon an equality with other creditors.” See, also, In re Franklin Brewing Co. (C. C. A.) 272 F. 828, 832; American Exchange Bank of Milwaukee, Wisconsin, v. Goetz (C. C.

A.) 283 F. 900, 902; In re Southern Pharmaceutical Co. (D. C.) 286 F. 148, 152. As we have reached the conclusion that the new notes were not received in payment of the old notes, and that the bankruptcy court had not the power to inflict a penalty upon the bankrupt for its attempt to obtain a preference, by disallowing its proof of claim upon the old notes, we find it unnecessary to consider the other errors assigned. The order of the District Court is reversed, and the action is remanded to that court for further proceedings not inconsistent with this opinion; the appellant to recover costs in this court.